by Dr. Gary North
Date 1/5/2009 • Issue 42
Every year, from late December through the first week of January, there are lots of articles published on making New Year’s resolutions. Some of these articles recommend New Year’s resolutions. Other articles make fun of them. The authors point out the obvious fact, namely, that almost nobody ever follows through on a New Year’s resolution.
I am in the camp of the skeptics. I do not believe that most people will follow through on any resolution, let alone a New Year’s resolution, unless there are enormous positive benefits to be secured by following through. People think about the benefits, but then the cost of obtaining these benefits becomes obvious in the first week after New Year. The cost of the benefits is immediate, while the benefits themselves are far in the future. The tyranny of the urgent conquers the hope of the future.
We all know this, but we are tempted to make New Year’s resolutions anyway. This is the triumph of hope over experience. The trouble is, people become discouraged early, and this discouragement lasts for as long as the New Year’s resolution had specified. The only way to escape, other than actually getting back on track, is to self-consciously stop thinking about the New Year’s resolution. This tends to produce guilt. People conclude that they are unable to follow through on long-term plans, and so they are tempted not to make any long-term plans.
The problem with New Year’s resolutions is that they are not part of a systematic plan. The resolutions have no plan undergirding them, and they do not fit into an existing long-term plan. The main reason for this is that very few people have made existing long-term plans. They do not write down their goals, nor do they write down a plan to achieve these goals. This is a mistake that almost everyone makes, and it keeps most people from achieving their potential.
The Bible has an entire chapter devoted to the question of vows made to God: Numbers 30. It has rules regarding these vows. These vows are voluntary, and they are not to be entered into lightly. Once made, they are to be fulfilled. This is why it is unwise to make a formal vow unless you’re willing to pay the price of fulfilling it. The obvious one is the marriage vow. There are others.
I do not put a New Year’s resolution in the same category as a vow made to God. But there is a pattern here. We live in a society in which contracts are violated, vows are violated, and New Year’s resolutions barely make it to February.
PAYMENT OFF THE TOP
I do have a recommendation for a New Year’s resolution. In fact, there are two resolutions, and they are interlinked. The first resolution I call “pay God first.” The second resolution is called “pay yourself second.”
“Paying God first” is your tithe. It comes first. Find some way to pay it. If you can set up an automatic withholding plan at work, do this. Have the money deposited in your church’s account. Talk with your payroll person and your church on how to do this.
The fact that churches do not recommend this in new members’ classes indicates that they are in begging mode. Churches should make it easy for people to meet their obligations.
The phrase, “pay yourself first,” is a familiar one inside the personal finance industry. The idea of paying yourself first is based on a view of thrift. This view says that it is imperative that a person take 10%, or some other fixed percentage, of his after-tax income, and invest it. No matter what takes place, no matter what emergency arises, an individual self-consciously takes 10% of his income after taxes, and invests it.
Why do people call this “pay yourself first”? They do this because they understand that an individual owes something to himself. He owes in the present what it will take to sustain him in the future. His present self owes his future self.
Why does he owe this? Because he is personally responsible for his own actions. He will require savings in the future in order to sustain them in his old age, or when an uninsurable disaster strikes. So, he is careful to set aside money every month to invest in a systematic program that will meet his needs in the future. He does this because he does not wish to become a burden to other people. He does not want to become a charity case.
Another aspect of “pay yourself first” is that at some point, compound economic growth is supposed to take over. The resources that have been set aside for future use begin to generate a return on investment. Over time, this return multiplies the value of the investment portfolio. This is called putting your money to work for you. The stream of income feeds back into the total portfolio. This stream of income multiplies over time, and the individual finds that the end of his life, he does not have to work in order to build capital. The capital produces sufficient income to maintain his lifestyle whether he works or not.
This has been the promise of IRA programs and 401(k) programs for two decades. The problem is, because of the nature of the investment markets in a world governed by the central bank policy, inflation, bad investments, and government promises of bailouts have combined to reduce the rate of return on capital. This has made it difficult or even impossible for the vast majority of people who have set up retirement programs that will enable them to retire in comfort on the income generated either retirement portfolios. They have believed government promises about protecting the small investor, and they have therefore lost a great deal of money. Even worse, they have lost a great deal of time. The longer that they remain naive about the nature of economic returns in a world governed by central banking, the less likely they will be in a position to live off of the income generated by their investment portfolios.
What good is it to pay yourself first? If all of your savings will be eroded by monetary inflation and the business cycle, what good is it to save? This depends on what you invest the money in. If you invest in assets that tend to rise with the rate of price inflation, you can stay ahead of the monster. But there is something else that is even more important. It is crucial that an individual take the attitude he is responsible for his own future. If he does this, he will adopt a system of thrift, whether the money goes into conventional markets or whether it goes into the family business. The point is, the individual recognizes that the future does not take care of itself; it requires planning and the proper execution of the plans in order to achieve a major goal, such as retirement.
It is the self-discipline of setting up goals, establishing a plan, and maintaining the plan that is crucial for success in life. It is far less important what an individual invests in an effective the invests on a systematic basis. It is the constant attention to detail, and the constant exercise of self-discipline, that is crucial for long-term success. It is the mental habit of saving on a regular basis, no matter what, that makes the difference in an individual’s productivity. The habit of saving, which rests on the habit of deferred gratification, pays dividends apart from on investment portfolio. This attitude begins to affect all aspects of individuals life or he this is what makes the big difference for him in the long run.
I recommend to people that people adopt this self-discipline early in life. I taught my children to tithe 10% of their income and save 10%. As adults, they are all extremely thrifty, and they all have maintained a savings program. They understand that they are personally responsible for their old age, and they also understand that the Federal government is going bankrupt. They understand that no official is going to intervene on their behalf when they are old and weak, and therefore they do what they can to build assets to protect themselves in the future.
Thrift is more than an systematic program of investing. It is a mental attitude regarding the future. This attitude takes full responsibility. It does not attempt to blame the government for the government’s failure to protect the public from their own lack of self-discipline.
This is why I recommend a two-part New Year’s resolution. First, you promise yourself to pay 10% of your gross income to your local church. You do this because it is not your money. This is a kind of return on investment for God. It is comparable to a licensing fee paid by individual companies that are part of a franchise.
By paying yourself second, you acknowledge that you cannot be sure about the future. You build up resources that can be used at a time of your life when you will not be able to support yourself. Your lifetime plan has to have some consideration of the fact that you will grow old, and you will become less able to earn a living. This faces the fact of ageing: old age does reduce most people’s productivity. Acknowledge this early if you are going to enjoy a decent lifestyle in old age.
In past eras, the vast majority of people lived their lives on the assumption that their children would take care of them in some way. Welfare state economics has undermined this ancient assumption. This is temporary. When Medicare and Social Security go the way of all flesh, the older tradition will again manifest itself in the American public.
We live in a temporary period of time in which people have naively believed that they will be able to save enough money, and also gain a large enough after-inflation, after-tax rate of return to gain sufficient wealth to provide a comfortable retirement. That illusion has been challenged over the last 14 months. It will be challenged again. The stock market is not going to deliver the goods.
I recommend to people that they systematically save 10% of their income every month, or every paycheck, as a kind of liturgy. It is a liturgy acknowledging the stages of life. It is a reminder that the clock is ticking. As a self-defense measure against the ticking of the clock, an individual sets up a savings program to which she contributes on a regular basis.
I think the best way for most people do this is to set up an automatic savings-withdrawal program through their job. It does not matter much what the money goes into initially. It can go into a bank account. The important thing is that the individual not get used to spending this money, and therefore not become dependent on it. He transfers it automatically to a thrift program. He adjusts his expenditures to work around his income, which is then reduced by whatever he has set up in his savings-withdrawal program. This is a form of resolution that has teeth. The reason why it has teeth is that most people cannot feel the bite. The money comes out of paycheck, but people do not become dependent on it, nor do they really miss it.
The United States government caught onto this when it imposed withholding taxes in 1943 as a wartime measure. Tax revenues quadrupled within a year. I suggested this is one of the few lessons that the government has ever provided that can seriously benefit the public. The principle underlying the success of the withholding program is this: “Out of sight, out of mind.” It is the opposite of this: “Absence makes the heart grow fonder.”
If you want to be successful with a New Year’s resolution, make sure that the New Year’s resolution has teeth. The best possible teeth are teeth that take their bite quietly and painlessly.
The first few months of a savings-withdrawal program will be extremely painful. Adjusting to a lower income is difficult for almost all people. This is why it is so important that people begin early in life with the savings withholding program. They must not get used to the income their job generates. The transition is always painful. This is why people postpone making it. But if the pain is not experienced early in life, it will be experienced later in life. It is better to experience an early in life, when you have the strength, resiliency, and youth to adjust. You don’t want to be forced into adjustment when you’re 80 years old.
If you are serious about this particular New Year’s resolution, on Monday morning, you will contact whoever is in charge of payroll at your company. Ask that person to set up your account so that the computer begins extracting money on a regular basis. This will be put into a savings program. This may be a tax-deferred program such as an IRA, or it may be some other form of savings. The important thing is that it is automatic. Your goal here is to reduce your dependence upon your income in the present for the sake of the future.
The best plan is an automatic plan. You don’t have to think about it. You set it up once and live with it.
A combined 20% reduction of income is too big for most families’ budgets. There are two ways to handle this. The best way is to get a second job until the 20% limit is met. The second-best way is to cut expenses, while adding one percentage point per month to the tithe. Only when the tithe is met does the savings-withdrawal program get activated. Pay yourself second.
You will have to decide where the money goes after it arrives in your bank account. This will force you to pay attention to the economy. But this should be a separate issue. The crucial issue is setting up the automatic withdrawal plan.